Insight
October 2024
Gabi Mantle
EquiLend Update on the UK AST T+1 Report and Recommendations
Recap
The UK Accelerated Task Force for T+1 published its draft recommendations on September 27, 2024, which will be central to an effective T+1 settlement launch in the UK. These recommendations for T+1 in the UK consider some of the lessons learned from the May move to T+1 settlement in North America, Argentina and Jamaica.
Market Intelligence
The ambition for increased market efficiency is a shared aim in the UK and Europe going forward. Gabi Mantle, Global Head of Post-Trade Solutions at EquiLend, who has been a taskforce member throughout, commented: “It is fantastic to see automation called out as an overarching requirement for the ultimate success of T+1 in the UK. The observation in the Draft Report that manual resource should only be a short-term work-around is astute and has been at the heart of the difficulties some firms reported in the recent Citi report on T+1 implementation.”
For securities finance, streamlining the recalls notification and workflow process was a common theme in North America pre-T+1 and one that has continued in our UK and European client conversations. In analyzing recalls behavior in the U.S. and Canada since their shift to T+1 in May this year, we have found that market participants are issuing the bulk of their recalls ever earlier in the U.S. work day, but we also see recalls notifications processed throughout the day — and the evening. Our hypothesis is that processes are shifting to real-time, starting on T+0 rather than being processed in batch in the morning on T+1. In some instances, we believe recalls processing is being covered by global teams rather than solely in the North America region; automation is facilitating a smooth hand-off between teams along with round-the-clock recalls issuance, in line with the guidance for the UK.
Market Reaction
Of the recommendations emerging from the technical Stock Lending sub-workstream, part of the Trading and Liquidity Workstream, there are two key recommendations that we consider most important for the execution of T+1 in the UK, with notable highlights in other workstreams.
Stock Lending Workstream:
- SFT 04.00: Automation of Stock Lending recalls – Lending intermediaries and borrowers adopt ISLA market practice for recalls and automate recall processing either through in-house development or use of vendor services
- SFT 05.00: Market Cut-Off for Stock Lending recalls – The operational deadline for instructing next-day stock lending recalls should be aligned with the closure of UK regulated venues. Today, this is 16.30 UK time as per the London Stock Exchange
Other Workstreams:
- LEL 03.00 UK T+1 Process automation
- Principle Recommendations – Static Data
- Additional Recommendations – Environmental
We are pleased to see recalls automation included in the recommendations. Common throughout the report is the need for greater automation across the post-trade lifecycle, not only the named automation of recalls. We saw a hugely positive reaction from our clients with the launch of a fully reimagined Recalls Notification and Workflow tool – a complete workflow for distributing and receiving recalls, with seamless integration with the wider EquiLend ecosystem via real-time messaging, allowing for complete system to system automation. This enhancement to our post-trade ecosystem was, in part, an innovation driven by our clients’ shared concerns as they looked to prepare for the shift. Created with the T+1 shift in the U.S. and Canada in mind, our T+1 solution was fully embraced by clients, as evidenced by the 176% increase in recalls volumes on our platform in the first week following the change.
Recalls relationships on platform have continued to increase since May 27, and we’ve doubled the number of participants interreacting together on platform in that time. This increase in relationships creates an ever more global, interconnected network of market participants all facing the same challenges of time and information accuracy.
Whilst we welcome the inclusion of setting and enforcing market cut-off for UK recalls, our solutions are built to handle recalls and returns on a real-time basis 24/7, so we are agnostic to any deadlines. As a lesson learned from the U.S. and Canada, agreeing these deadlines well in advance of the move to T+1 is paramount to avoid the last-minute back and forth experienced in late May.
The enforcement of the market cut-off within the current proposals from the UK Taskforce would see the UK recalls cut-off set to 4:30 p.m. GMT / 11:30 a.m. EST, leaving very little time for U.S.-based borrowers or lenders to address lifecycle events within T+1 for the region they are trading in. These U.S.-based market participants will have to consider their unwinds almost before they have booked a trade. The rulesets available within automated recalls tools ensure that recalls are managed as intended, day or night, leaving only exceptions-based resolutions to be prioritized by the back office.
Without automation and digitization as standard, it will become impossible to react quickly enough to accommodate borrow/loan trade needs and manage post-trade lifecycle events in the appropriate timeframe, both of which pose a threat to global liquidity, the mission at the center of the securities finance sector.
Further to this, we both welcome and support the inclusion of the recommendations of the Static Data and Environmental Recommendations to prioritize digitized SSI management and Digital KYC.
EquiLend Enhanced SSI, powered by our partners at SSImple, provides SSI pre-matching, enrichment, management and secure storage and sharing of SSIs. The combined automation of recalls and SSIs are a powerhouse for meeting the challenge of T+1 in the UK head on. Recommendations from the Financial Markets Standards Board (FMSB), in a separate set of recommendations, currently under consultation, additionally address the treatment and management of SSIs. No conversation on a seamless transition to T+1 in the UK would be complete without the inclusion of SSIs. Often overlooked, poor SSI management presents significant challenges in a T+1 settlement scenario, where T+1 trade settlement would easily be threatened by the persistence of inaccurate SSIs.
The final hurdle in a smooth T+1 for the UK is in the imperative need to digitize KYC, per the additional environmental recommendations from the AST Technical Working Group Draft Report and Recommendations. Digital KYC will ensure the removal of bottlenecks which delay and restrict additional liquidity from entering the securities finance market. EquiLend Onboard+ supports borrowers and lenders in document sharing, storage and management, ensuring client onboarding time is reduced by up to 90%.
Without supporting the recommendations for firms to automate these processes, T+1 will not be operationally viable for the UK. Greater automation throughout the securities lending lifecycle in pre-trade, execution and post-trade ensures greater accuracy and speed for both sides of the trade. It protects liquidity, minimizes breaks and ensures compliance, globally. With elevated interest rates, and multiple layers of regulatory reporting each with their own respective requirements, fails have never been more expensive.
